Perennial Real Estate Holdings - DBS Research 2018-02-09: Medical Hub Vision Slowly Unfolding

Perennial Real Estate Holdings - DBS Vickers 2018-02-09: Medical Hub Vision Slowly Unfolding PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings - Medical Hub Vision Slowly Unfolding

  • Perennial Real Estate Holdings (PREH)'s FY17 results boosted by divestment, fair value and acquisition gains; 4Q17 boosted by fair value gains mainly from China investment properties.
  • Achieved 85% committed occupancy at Chengdu medical hub.
  • Expects to deploy healthcare funds within 3 years.
  • Raised dividend to 1 Scents vs 0.4 Scents in FY16.



Trading at 0.5x P/BV; maintain BUY. 

  • We maintain our BUY rating with Target Price of S$1.05 (based on 50% discount to RNAV) on Perennial Real Estate Holdings (PREH). The stock currently trades at 0.5x P/BV, offering massive upside as it gradually realises its RNAV potential.


Where we differ. 

  • Unlocking development value from strategically located land bank with partial exposure to healthcare. We are one of two brokers with coverage on PREH.
  • PREH’s hidden gems lie in its vast integrated projects in strategic locations across the main transportation hubs in China though these have lengthy gestation periods. Apart from property, PREH has built a portfolio of medical and healthcare services to leverage on rising healthcare demand in China and Singapore.


Potential catalysts: 

  • Strata/en bloc sales, divestment of assets, building recurring income through healthcare hub and business.


FY17 results supported by divestment/fair value gains; expanding medical business via healthcare fund. 

  • PREH posted strong FY17 results with a net profit of S$100m vs S$35m in FY16, boosted by fair value and divestment gains. The key highlights from the results were:
    1. achieved 85% committed occupancy in Chengdu medical hub;
    2. setup of healthcare fund, to deploy within 3 years;
    3. received written approval to designate plot 5 in Xi’an development for medical usage; and
    4. reviewing plans to unlock value in UE and Chinatown Point 


Valuation: 

  • Our Target Price of S$1.05 is based on a 50% discount to RNAV to factor in potential execution risks and long development/gestation period. We have assumed marginal contribution from its new healthcare venture.


Key Risks to Our View

  • Negative changes to property rules in China and exposure to RMB currency fluctuations as PREH owns a large land bank in China. Further deterioration in operating cashflows, coupled with high interest cost, may impact interest cover.



WHAT’S NEW - Medical hub vision slowly unfolding 


4Q17 supported by fair value gains. FY17 boosted by divestment/fair value gains and acquisitions.

  • Perennial Real Estate Holdings (PREH) recorded strong FY17 results with net profit of S$100m vs S$35m in FY16, boosted by fair value gains on revaluation of investment properties mostly in China of S$39m in 4Q17 (+61% y-o-y) and gains recognised in 9M17
    1. share of gain on bargain purchase of United Engineers (UE) of S$19m (based on its effective stake), 
    2. S$56m divestment and re-measurement gain from the sale of 20.2% stake in TripleOne Somerset, and
    3. S$46m fair value gain from the revaluation of the reclassification of Xi’an North High Speed Railway Integrated Development Plot 4 to investment property.
  • FY17 operating net profit (including divestment gains) was S$48m vs S$0.3m in FY16.
  • FY17 revenue fell 32% y-o-y largely due to lower rental and management fees from TripleOne Somerset following the divestment, partially mitigated by one-off divestment fee from the sale of TripleOne Somerset, oneoff consultancy fees earned from United Engineers’ (UE) transaction and higher revenue recorded by Perennial Qinyang Mall in Chengdu (revenue from China: +6.8% yo-y).
  • Share of results from associate were up 74% y-o-y to S$56m largely from share of results from UE (including S$26m gain on bargain purchase of UE), offset by oneoff loss adjustment from a lease restructuring with Shenyang Red Star Macalline Furniture Mall recorded in 1Q17.
  • 4Q17 recorded net profit of S$27m (vs S$26m in 4Q16), largely boosted by 61% y-o-y increase fair value gains recognised on revaluation of investment properties, mainly in China from Perennial International Health and Medical Hub, Xian North HSR Development Plot 4, Chengdu East HSR Integrated Development Plot D2 and Capitol project in Singapore.
  • Singapore and China remain its two largest markets. Singapore contributed 27% and 48% in revenue and EBIT respectively, while China contributed 44% and 53% respectively in FY17.
  • As at 4Q17, net debt-to-equity stood at 0.57x (vs 0.66x in 4Q16) with an average interest cost of 3.8% (vs 3.3% in December 2016). The improvement in the net debt-to-equity ratio was largely due to the debt de-consolidation of TripleOne Somerset.
  • PREH declared 1 Scents annual dividend vs 0.4 Scents in FY16.


Updates on major projects:


TripleOne strata sales and AXA Tower proposed en bloc.

  • In FY17, TripleOne Somerset recorded total strata sales of S$41m at ASP of S$2,726 psf (9M17: strata sales of S$39.4m at ASP of S$2,731psf). 
  • For AXA Tower, total strata sales AXA Tower was S$17m in FY17 at an average price of S$2,376psf. There is the potential of an en bloc sale of AXA Tower. However, we note that some existing tenants have taken up additional space for expansion, such as Lazada (expanding by 3.6x and taking up 16.6% of total office NLA), and Go-Jek. 
  • The upgrading and refurbishments at both TripleOne and AXA Tower are expected to complete by 2019.

Acquisition of 33.5% of United Engineers. 

  • Management is currently looking at options to unlock the value of UE’s properties such as UE Square and may divest non-core assets.

Acquisition of additional 5.49% in Chinatown Point.

  • Management is currently exploring value creation opportunities through potential enhancement works to increase the property’s NLA through usage efficiencies.

Chengdu HSR Integrated Development. 

  • The Perennial International Health and Medical Hub has recorded a committed occupancy of ~85% (~65% as at end-3Q17). New mini-anchor tenants include Chengdu BGI Perennial Genomics Diagnostic Imaging Centre, a JV between BGI Genomics and Perennial. One of the mini anchor tenants, Care Alliance Rehabilitation Hospital of Chengdu has soft-opened in 4Q17 while other mini-anchor and anchor tenants are expected to start operations by 2H18. 
  • Fitting out works for Chengdu Xiehe Home is ongoing and on track to commence operations in one tower from 2Q18.

Beijing Tongzhou Integrated Development. 

  • Management targets to launch residential properties for sale this year.

Xi’an North HSR Integrated Development. 

  • PREH has secured a written approval to designate Plot 5 for medical and healthcare usage and is in the process of obtaining other planning approvals. Three towers on Plot 4 have topped out.

Healthcare fund. 


Healthcare segment - expanding eldercare homes. 

  • The total number of operational beds stood at 3,577 as at Dec17. It currently has a committed pipeline of 7,750 beds and potential pipeline of more than 13,500 beds. Renshoutang continues to expand via its three-pronged strategy - leasing, public-private-partnership and acquisition models.


Maintain BUY; Target Price S$1.05 

  • We lowered our FY18F earnings marginally by 2% to incorporate marginal increase in interest costs and adjustments to the contributions from Singapore portfolio post with TripleOne Somerset as an associate now.
  • We continue to expect near-term earnings to be driven by divestment/fair value gains. In the short-term, there will be additional earnings contributions from UE before potential AEI starts for some of the assets.
  • We remain positive on its medium to long term development plans especially as its investments in China (and its healthcare hub) slowly comes to fruition despite potential near-term financial risks. 
  • We believe the strength of its stakeholders (79% owned by its four key sponsors including Wilmar’s Mr Kuok, OSIM’s Mr Ron Sim and CEO Mr Pua, and partners and key management team) play an integral role to execute and mitigate potential financial risks.




Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-02-09
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.050 Same 1.050



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